NorCalSavant

Interest rates are low, and house prices are down, but all you eager mortgage buyers out there, beware.  Mortgage fees and private mortgage insurance (PMI) have gone up, sometimes based on the credit score, and underwriting and appraisal rules have changed for the worse.

Historic Mortgage Interest Rates

Figures below show the historic conventional conforming 30-Year fixed mortgage rates from 1971 through 2009, and 1993 through 2009.  Mortgage interest rates averaged the highest at over 18.5% in 1981 (along with high inflation).  Mortgage rates rarely went above 7% after 2002, and averaged over 6.6% at their 2008 peak in July.

Thanks to the concerted efforts by the Federal Reserve and Treasury, mortgage interest rates have come down drastically since then.  For the week ending April 30, 2009, the average interest rate for 30 year fixed-rate mortgage was 4.78% with 0.7 points in fees.  This equaled the rate for the week of April 2, 2009, and is a historic low according to Freddie Mac’s survey going back to 1970.

Additional Fees

Fannie Mae and Freddie Mac have raised some of the fees charged to lenders when they buy or guarantee certain types of mortgages, most of which are going to be passed down to consumers.  It will impact both — mortgages for new purchases, and refinances of existing mortgages.

Fannie Mae has revised upwards its Loan-Level Price Adjustment (LLPA) Matrix effective April 1, 2009.  Depending on the borrower’s credit score and (mortgage) loan to (home) value ratio (LTV), the additional fees range from 0.25% to 3% of the loan.  Refinancing with a loan bigger than the principal balance on existing mortgage for a cash-out will add another 0.25% to 3% in fees.

For example, someone with a credit score of 660 and LTV of 85% would pay 2.5% in fees instead of 1.75% prior to April 1, for a 30-year fixed-rate mortgage.  Additional 2.5% fees would be tacked on for cash-out refinancing in such a case.

Condominium mortgages seem to have been hit the hardest.  Refinancing a condo loan might be affected by the presence of commercial tenants or investors in the entire condo project.  There is now a mandatory 0.75% fee on all condominium loans regardless of the borrower’s credit score, and other fees have been jacked up.  For example, someone with a credit score of 690 and LTV of 80% on a condominium with a 30 year fixed-rate mortgage with initial payments of interest only will now pay 3.25% in fees instead of 1.25% prior to April 1.

Some lenders are going further in imposing new restrictions.  For example, Wells Fargo now requires a minimum FICO credit score of 720 for loans with LTV greater than 80% instead of 620.  It has also reduced the maximum total debt-to-income ratio from 45% to 41%.

The cost of private mortgage insurance, or PMI, required when LTV is greater than 80%, is also going up for those with lower credit scores under the new “risk-based pricing” by mortgage insurance companies.

Appraisal Rule Changes

Under Fannie Mae and Freddie Mac’s new Home Valuation Code of Conduct, effective May 1, mortgage brokers can not order appraisals directly, and lenders can not select or communicate with appraisers.  Lenders must use third-party “appraisal management companies” to assign the job to appraisers in their networks.  If the appraisal comes lower, the loan may not go through.  As a consequence, borrowers will probably have to pay appraisal fees upfront whether the loan goes through or not.

Appraisers are also being required to include a “market condition” report providing statistical analyses of local sales and pricing trends.  It is expected to add to the cost of preparing an appraisal report, which is sure to be passed down to the borrower.

Each point in extra fees is equal to 1% of mortgage loan.  For an average $200,000 mortgage, each point in fees equals $2000.  An increase of three points in fees means additional fees of $6,000.  In the more expensive neighborhoods with higher home prices, the additional fees could amount to two to three times as much.

It would make sense to ask your lender or mortgage broker if your loan will be sold to or insured by Fannie Mae or Freddie Mac to see if you would be liable for these higher fees.  It could be worth a lot of money to compare  independently or with a mortgage broker, the interest rate and total fees charged on loans sold/insured by Fannie Mae/Freddie Mac as well as other lenders before selecting a loan package for your new home mortgage or refinance.

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